By Blaise Udunze
Amid the fear of imminent recession, the monetary policy committee of the Central Bank of Nigeria has moved to buoy the economy, necessitating the adoption of flexible foreign exchange regime and leaving the rates unchanged.
The decision by CBN’s-moderated Monetary Policy Committee (MPC) meeting to adopt a flexible exchange rate regime for the economy and float new forex window for ‘critical transactions’ is monetary policy path more suited for an oil exporter. The tough and difficult decision of the CBN governor, Godwin Emefiele led MPC will open up the economy for over $12 billion Foreign Direct Investment (FDI) inflows in the next quarter.
Meanwhile, President Muhammudu Buhari, has given the go-ahead to adopt flexibility in the naira exchange rate, though opposed to devaluation.
In his Democracy Day Speech on 29 May, President Buhari said: “On the economic front, all oil dependent countries, Nigeria included, have been struggling since the drop in prices. Many oil rich states have had to take tough decisions similar to what we are doing. The world, Nigeria included has been dealing with the effects of three significant and simultaneous global shocks starting in 2014: a 70per cent drop in oil prices, global growth slowdown and normalization of monetary policy by the United States federal reserve.
“We resolved to keep the Naira steady, as in the past, devaluation had done dreadful harm to the Nigerian economy.”
However, explaining rationale for the decision, Emefiele, said the drastic drop in the country forex earnings, which has made it difficult for the country to fully meet forex demands prompted it to liberalise the market and create improved dollar liquidity. He promised that the flexible exchange rate regime modalities will be worked out by the CBN and banks later on.
With this decision, nothing has generated more interest, and turned a better topic of debate of recent as analysts have predicted that the policy shift is expected to attract over $12 billion in the third quarter as more foreign investors return to take advantage of the new policy shift.
However, the expectation is that foreign portfolio investors and foreign direct investment worth over $12 billion, which have been staying on the side-line would find their way into the system on the back of foreign investor confidence receiving a boost as the interbank market is reinstated as the official platform for market determined exchange rate.
The experts were strongly expressing that it would increase foreign investors participation at the nation’s bourse. They pointed that the multiplier effect of the new forex policy would impact positively on the economy; ward off the recession and frustrate currency speculation and hoarding amongst others.
The Head of Research and Investment at a top investment banking and advisory services, Afrinvest Securities, Ayodele Ebo said while Nigerians await the “modus operandi” of the new FX regime, he affirmed that flexible exchange rate policy will go a long way in addressing the current spread between the official/interbank and the parallel market rate, especially, “foreign portfolio investments and foreign direct investments which have been staying on the side-line would find their way into the system on the back of foreign investor confidence receiving a boost as the interbank market is reinstated as the official platform for market determined exchange rate.”
More importantly, he stated that it would also create the required liquidity for oil marketers to source FX at the guided rate of N285.00/US$1.00 assumed by Petroleum Products Pricing Regulatory Agency (PPPRA) in its pricing template.
According to him, in the short term, this will sustain the observed improvement in the petrol market following the move by the NNPC to deregulate of the petrol market.
“Whilst we hope that “Flexibility of Interbank market” is in the true meaning of the phrase, the overall impact of the decision remains dependent on the details of the operation of the new FX rate regime most especially as it relates with transparency issues surrounding the critical sector the Apex Bank will be supporting,” Ebo stated.
The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the flexible market-determined exchange rate regime was long overdue, describing it as “a much-awaited decision.”
“We have been canvassing this for a very long time; we are happy that the CBN has finally adopted it,” he said.
Mr Harrison Owoh, a Bureau De Change (BDC) operator said that the policy would impact positively on the economy and remove distortion, hoarding and speculation in the currency market.
Owoh said that allowing the forces of demand and supply to dictate the exchange rate was a universal policy that would discourage corruption in the foreign exchange market.
He said, “ Nigeria operates a peculiar economy where risen commodity prices do not come down in spite of a better economic policy and environment.
“Flexible exchange rate will remove distortion, hoarding and speculation of currency in the economy.
“It is one of the mechanisms used in the foreign exchange market to discourage round tripping.
“The policy has been successful in advanced economies of the world,” Owoh said.
An economic analyst and Head, Investment Advisory, Sterling Capital, Mr. Sewa Wusu, also hailed the MPC’s decision.
“The muted economic growth was traceable to structural issues such as scarcity of forex and scarcity of fuel. The MPC’s latest decision on the exchange rate will help to stimulate growth. It is a right move,” he added.
Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, said, “the decision by the MPC to adopt a flexible exchange appears to be very apt considering the current development in the foreign exchange market.”
According to him, “by the policy, exchange rate would be market determined while the CBN would be the invisible hand in the market which uses money supply to affect the price indirectly.”
Essentially, Ademola noted that “the flexible exchange rate mechanism adopted will now make Nigeria to conform with the “impossible trilogy” that require an independent monetary policy and liberal capital mobility to be combined with a flexible exchange rate for efficiency.”
“Although a lot of people expected only a devaluation of the Naira, it would only be a temporary measure as the pressure on the currency would continue as long as there is a price peg. I must say here that it would have been better if this policy had been adopted and implemented some years ago when the country had strong foreign currency reserves and savings which could be deployed to stabilize the market and prevent a severe initial impact. However, it is better late than never,” he added.
“It is also noteworthy that there are several variants of the flexible exchange rate some with adjustments around a peg such as inflation or money supply. The adoption of such adjustment pegs serves as automatic stabilisers based on forward guidance from the monetary authority. In other words, it would be expected that the CBN would act through the supply of FX to the market once the set target (say inflation, credit growth or GDP growth rate) is breached.
“Because the CBN has not yet released the guidelines, it is difficult for us to determine the variant of the flexible exchange that the country will adopt. But overall, I think the adoption of this mechanism is a good one,” he pointed.
Former President, Chartered Institute of Bankers of Nigeria (CIBN), Mr Okechukwu Unegbu, said that government should particularly check round tripping.
Unegbu said that government should tackle social dislocations to reduce unemployment, high inflation and the depressed economy to achieve the desired growth.
He advised government to pursue economic diversification to strengthen other sectors of the economy in line with the current realities.
Analysts at Eczellon Capital Ltd said, “holding rate constant in a period of weak pace of economic growth would likely provide succour for the economy as the structural drivers of inflation in the country are expected to wither in the coming months; likewise, the commencement of the implementation of the budget should also provide some form of succour to the economy in the coming months “
Besides, the analysts are of the view that “the decision of the MPC to introduce a flexible interbank exchange rate market seems responsive enough for a market that has long grunge under a fixed exchange market rate system.”
The Eczellon analysts informed that, “how the new “flexible” exchange rate would impact financial markets and the economy would largely depend on its details which is expected in the “coming days.”